The Bank of England did as expected and raised interest rates by 0.25% to half a percent, reversing the decision they made last year following the Brexit vote (which some considered a knee jerk reaction by the BoE and unnecessary). Perhaps this partly explains why sterling rapidly weakened across the board following the 0.25% increase.
However, the main reason seems to be that they appear to have changed their minds regarding future increases. At the last meeting, they said that interest rates would have to rise faster than markets currently expect, but this time there was no such statement. Instead, they urged caution which has convinced the markets and speculators that any further rate rises will likely be in late 2018.
This reinforces why budget and risk management are key – something we highlight in our quarterly currency forecasts. They are still available to download and have proved hugely popular to date. Do grab hold of a copy and let us know what you think.
GBP: pound falls of a cliff despite interest rate hike
UK interest rates were increased by 25 basis points yesterday in a move that was largely expected. However, comments that followed caused sterling to weaken sharply against the euro and US dollar, as Governor Mark Carney and the rest of the Monetary Policy Committee urged caution. In many ways, the central bank were forced into making the decision – strange, how a bullish move can be done in a bearish way.
The vote was 7-2 in favour of a rate hike, with Sir Jon Cunliffe and Sir Dave Ramsden the only two MPC members who decided against increasing rates. Recent UK economic data encouraged the increase, as well as rising inflation. However, not everybody thinks that increasing rates is a good idea, as the positive growth figures could prove to be temporary and UK households are already feeling the pinch owing to slowing wage growth. The 5,000,000 British people with variable rate mortgages will now pay more.
The fallout from the decision is set to continue and we expect some significant sterling volatility over the coming days and weeks. Today we have the Markit services purchasing managers’ index figures.
EUR: euro claws back all recent losses against sterling following rate decision
After a recent spate of disappointing performances, the euro managed to strengthen against the US dollar and sterling yesterday. While the move against the greenback wasn’t all that dramatic, it climbed significantly against the pound to reverse all of its recent losses and more besides.
The last few days have helped show that currency movements are not always centred on the region involved. The euro has strengthened against the pound for no other reason than the UK interest rate hike and the subsequent comments. It sometimes beggars belief that allusions to things that might happen in the future can have such a significant bearing on currency pairings, but there we go.
Having said this, the release of the German employment figures didn’t do any harm, as they came in slightly worse than expected. A forecast of 10,000 jobless claims actually came in at 11,000 but, again, this had little bearing on the single currency’s performance. Yesterday was all about the BoE decision and it is fair to say it didn’t disappoint – at least in terms of drama.
USD: dollar surges against sterling despite some disappointing data
The dollar enjoyed a brilliant day against the pound yesterday following the bearish sentiments expressed in the BoE meeting minutes. While rates were hiked, Carney urged caution and essentially hinted that any rate increases in the future would be small and irregular. Traders piled into other currencies as a result and sterling weakened.
Meanwhile, Donald Trump announced that he would be replacing current Federal Reserve Chair Janet Yellen with Jay Powell. This was welcomed as it ensured continuity at the Federal Reserve and limited politicisation of such a key role.
Jobless claims came in at 229,000 against an expectation of 235,000 which was slightly disappointing, but attention will be turned to today, when we’ll see the balance of trade, unemployment rate, non-manufacturing PMI, and the all-important non-farm payrolls. We can expect some further strengthening against the pound irrespective of these readings.
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